The additional time commitment, responsibilities, and regulatory requirements associated with membership and heightened awareness of liability has resulted in an increase in the compensation a board member receives. The disclosure rules regarding executive compensation place an additional focus on director pay, requiring tabular disclosure of amounts and narrative disclosures of processes undertaken and policies employed to derive director compensation. There is some discussion by shareholders that unreasonably high compensation for director service may impair independence. Perhaps as a result, director pay philosophy is being reexamined to reflect new realities and expectations from institutional shareholders. The compensation committee (and perhaps, in collaboration with the nominating/governance committee) should take an active role in designing an appropriate director pay arrangement with final board approval.

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Key Features of Director Compensation

Director compensation includes the following features:

  • Total remuneration
  • Annual cash retainers
  • Board meeting fees
  • Committee meeting fees
  • Chair retainers
  • Equity awards (full value grants and stock options)

A trend in director pay is the shift from stock options toward the use of full-value equity grants. This is partly a response to option expensing and the perception that stock options promote short-term performance, while director compensation should be aligned with the long-term interest of shareholders.